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Gold: Your Strategic Asset for 2019

What Makes Gold a Strategic Asset

John-Rothans

Written by John Rothans

Apr 11, 2019

Some people buy gold coins because they believe it stabilizes their wealth, as gold can protect your purchasing power in times of rising inflation. Other people buy gold as a form of legacy protection in order to pass down to their kids later on.

Whatever the reason, buying gold can be a good thing for your future. Recent research from the World Gold Council says so and helps prove that gold is more than an asset—it’s a strategic asset.

What is a strategic asset?

Before we delve into how gold is a strategic asset, let’s go over what a strategic asset is.

According to Investopedia, strategic asset allocation involves setting target allocations for various asset classes and periodically re-balancing. “The portfolio is rebalanced to the original allocations when they deviate significantly from the initial settings due to differing returns from the various assets,” writes the website.

Investopedia goes on to explain that strategic allocation is compatible with a “buy-and-hold” strategy and one that emphasizes diversification.

By contrast, a dynamic asset involves frequently adjusting the mix of asset classes to suit market conditions, says Investopedia. “Adjustments usually involve reducing positions in the worst performing asset classes while adding to positions in the best-performing assets,” according to the website.

Now, how is gold a strategic asset? What follows are four reasons outlined in the World Gold Council report.

Why is gold a strategic asset?

1. It’s a source of long-term returns.

Over the past decade, institutional asset holders with allocations equivalent to the average U.S. pension fund would have benefited from including gold in the mix, reports the World Gold Council. Adding even just 2 percent, 5 percent, or 10 percent in gold would have produced higher risk-adjusted returns, says the council.

The report further notes that gold returns have outpaced the U.S. consumer price index over the long term “due to its many sources of demand. Gold has not just preserved capital, it has helped it grow.”

Gold’s correlation with stocks helps portfolio diversification in good and bad economic times

Correlation between gold and US stock returns in various environments of stocks’ performance* Credit: World Gold Council *As of 31 December 2018. Correlations computed using weekly returns based on the Bloomberg Commodity Index and the LBMA Gold Price PM since January 1971. The middle bar corresponds to the unconditional correlation over the full period. The bottom bar corresponds to the correlation conditional on S&P 500 weekly return falling by more than two standard deviations (or ‘σ’) respectively, while the top bar corresponds to the S&P 500 weekly return increasing by more than two standard deviations. The standard deviation is based on the same weekly returns over the full period.

2. It’s a diversifier that can mitigate loss in times of market stress.

Many asset holders are attracted to gold’s role as a diversifier, and as a hedge against market turbulence, inflation, and currency fluctuations, says the report. It’s no wonder, then, that since 2001, worldwide demand for gold as a strategic asset has grown an average of 15 percent per year.

“The strategic case for gold rests mainly on its effectiveness as a portfolio diversifier,” according to research published in 2010 in the Journal of Wealth Management.

3. It’s a liquid asset with no credit risk that has outperformed fiat currencies.

The report points out that gold has significantly outperformed all major currencies over the past century. Why? In part, because the supply of gold is rather finite, but paper currency can be printed in unlimited quantities. Paper currencies have long been volatile.

Gold has outperformed all major fiat currencies over time

Relative value between major currencies and gold since 1900* Credit: World Gold Council *As of 31 December 2018. Based on the annual average price of a currency relative to the gold price. **The ‘Mark’ was the currency of the late German Empire. It was originally known as the Goldmark and backed by gold until 1914. It was known as the Papermark thereafter.

4. It’s a great way to enhance overall asset performance.

Particularly during times of crisis—like the dot-com bust and the Great Recession—gold has outperformed several key asset classes such as Treasuries, government bonds, and commodities. The World Gold Council has long acknowledged this fact.

Simply put, gold holds the potential to offer long-term strategic asset holders stability in weak markets and economic climates. However, as the council’s report points out, gold is a strategic asset not only during times of great uncertainty; its price has increased by an average of 10 percent per year since 1971.

In good times and in bad, physical gold can deliver positive results as a strategic asset. Is it part of your diversified portfolio? Call U.S. Money Reserve at 1-844-307-1589 for a free one-on-one consultation. We can help you understand how physical gold fits into your future.

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